October 1, 2024
In a significant move that could reshape the landscape of options trading, SEBI has rolled out a series of stringent measures aimed at increasing investor protection and stabilizing the equity derivatives market. Among the key changes, small traders are likely to feel the biggest impact as SEBI hikes the minimum contract value for index derivatives to ₹15 lakh effectively pushing options trading out of reach for many retail investors.
Background:
Over the past few years, the derivatives market has witnessed an unprecedented surge in retail participation, particularly in options trading. Low entry barriers and high leverage made this segment especially attractive to small traders, but it also fueled speculative activities, particularly on expiry days when volatility peaks. To address these growing concerns, SEBI initiated a review through an Expert Working Group (EWG), followed by extensive consultations with stakeholders. The new rules are a direct result of these deliberations.
SEBI’s Directive:
Following deliberations and feedback from stakeholders, SEBI has mandated the following:
Upfront collection of Option Premium: Starting February 01, 2025, trading members must collect option premiums upfront to limit undue leverage at the client level.
Removal of Calendar Spread Treatment on Expiry Day: From February 01, 2025, calendar spread benefits will no longer apply to contracts expiring on the day of expiry, reducing basis risk.
Intraday Monitoring of Position Limits: Effective April 01, 2025, stock exchanges will monitor position limits for index derivatives during the trading day, ensuring no breaches of permissible limits.
Contract Size Adjustment: The minimum contract size for index derivatives will be raised to Rs. 15 lakhs, effective from November 20, 2024, aligning with market growth since 2015.
Rationalization of Weekly Index Derivatives Products: From November 20, 2024, stock exchanges will be allowed to offer weekly expiry derivatives on only one benchmark index.
Increased Tail Risk Coverage on Expiry Day: A 2% additional extreme loss margin (ELM) will be levied on short options expiring on the same day, starting November 20, 2024.
Impact on the Market:
These measures, which will take effect on November 20, 2024, are expected to reduce speculative trading, especially among retail investors who often engage in high-frequency, high-leverage trades with small capital. While SEBI’s intention is to ensure greater market stability, the changes could lead to a decrease in liquidity and a shift in the trading landscape.
SEBI Increases Option Contract Size and Margin Norms
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